State Legislatures Take Up Tax Reform and Relief in 2022

Lawmakers filed bills to exempt groceries from the sales tax base, an idea that has also been proposed in several other states, including Idaho, Kansas, Mississippi, Oklahoma, and Virginia. Unfortunately, this narrows the sales tax base while doing relatively little to make the sales tax more progressive, given that SNAP and WIC purchases are already exempt. In Alabama, this effort takes the form both of a legislative carveout (HB174) and a constitutional amendment (HB173) which would make the exclusion more permanent. The constitutional amendment would also cap the state’s unusual federal deduction at $4,000; we have written previously about how Alabama should scrap this distortionary policy altogether. No action has been taken on HB173 or HB174 at this time. However, HB231/SB152 was enacted in February to protect Alabamians from seeing a reduction in their state deduction for federal taxes paid as a result of enhanced federal tax relief received under the American Rescue Plan Act (ARPA), such as enhanced child tax credits. Legislators are also considering HB162, which would exempt from Alabama’s income tax the first $6,000 in distributions from defined contribution retirement plans for those 65 and older. This legislation passed the House on March 9.

Gov. Mike Dunleavy (R) has proposed suspending the state’s gas tax through June 30, 2023.

On March 11, a Maricopa County Superior Court judge struck down the tax provisions in Proposition 208, an initiated state statute narrowly adopted by voters in November 2020 that imposed a 3.5 percent surtax on taxable income above $250,000 (single filers) or $500,000 (joint filers). While Prop. 208 was in effect, Arizona’s top marginal individual income tax rate was 8 percent, up from 4.5 percent previously.

In 2021, while the legal challenge to Prop. 208 was still pending, several bills were enacted, including SB 1878 and 1828, to mitigate the effects of Prop. 208 by capping the top combined rate at 4.5 percent while consolidating four marginal individual income tax rates into two rates over time (one rate now that Prop. 208 has been struck down). However, a veto referendum, Prop. 307, has been approved for the November 2022 ballot that will allow voters to decide the fate of the tax cuts in SB 1828. In response, Gov. Doug Ducey (R) has signaled plans to convene a special session so legislators can “repeal and accelerate” the 2021 tax cuts, phasing them in more quickly while averting Prop. 307. To learn more about Prop. 208 and its aftermath, see our analysis here.

With a $31 billion budget surplus, California has plenty of room to maneuver. In response to high inflation, Gov. Gavin Newsom (D) initially proposed a one-year suspension of the automatic gas tax inflation adjustment scheduled to take effect on July 1, 2022, which would save drivers only about 3 cents per gallon. A Republican-backed bill that would have immediately suspended California’s highest-in-the-nation gas tax failed on March 14. In addition to suspending the July 1 gas tax inflation adjustment, Gov. Newsom has since proposed sending debit cards loaded with $400 per vehicle, up to $800, to those with vehicles registered in California, as well as offering free public train and bus services for three months.

On February 9, Gov. Newsom signed SB 113, restoring normal net operating loss (NOL) deductions and business tax credits for Tax Year 2022. In 2020, citing revenue concerns, legislation was enacted to suspend California’s NOL deduction for businesses with income of $1 million or more, and limiting business tax credits to $5 million annually, for Tax Years 2020, 2021, and 2022. (California was the only state to have fully suspended the use of NOLs for certain businesses during the pandemic.) Previously, some lawmakers championed a $163 billion tax increase package—a doubling of pre-pandemic tax collections—to establish single-payer health care in the Golden State, but this proposal—which we analyzed here—fizzled out.

In Colorado, Initiative 31 has been approved for the November 2022 ballot. This would reduce Colorado’s individual and corporate income tax rates from 4.55 to 4.4 percent, building upon the cuts that lowered the rate from 4.63 to 4.55 percent with the adoption of Prop. 116 in 2020.

Separately, HB 1021, a bill that would have accomplished the same rate reduction, was postponed indefinitely. HB 1125, which would have granted permanence to the one-year rate reductions that can be triggered by the state’s Taxpayer’s Bill of Rights (TABOR), was also postponed indefinitely. HB 1062, which would exempt prepared foods from the sales tax, is still under consideration. This has no existing precedent elsewhere—though Kansas is considering the same thing.

In Connecticut, Gov. Ned Lamont (D) has signaled support for enhancing the state’s property tax credit and accelerating the phase-in of a pension and annuities exemption. Meanwhile, Republicans have called for part of the state’s surplus to be returned to taxpayers in the form of a reduction of the general sales tax rate from 6.35 to 5.99 percent, and the temporary elimination of a 1 percent surcharge on prepared foods (including restaurant meals). On March 24, Gov. Lamont signed a bill into law to suspend the state’s 25-cent-per-gallon gas tax through June 30, costing an estimated $90 million, and creating an additional sales tax holiday.

Lawmakers agreed to a one-month suspension of the gas tax, scheduled for October, using a combination of state revenue growth and ARPA fiscal recovery funds, setting up a challenge over the Tax Mandate, which does not allow those funds to be used for tax cuts. The gas tax suspension is part of HB 7071, which the Florida legislature has passed, and Gov. Ron DeSantis (R) is expected to sign.

This legislation expands to 14 days the annual back-to-school and disaster preparedness sales tax holidays, establishes a new seven-day sales tax holiday for recreational supplies over Independence Day, creates a new seven-day sales tax holiday for tools and equipment over Labor Day, and suspends the sales tax for purchases of children’s books over the summer. It also creates a new one-year sales tax exemption for purchases of baby and toddler clothing and diapers, as well as Energy Star refrigerators, washers, dryers, and water heaters. Finally, it suspends for two years the sales tax on purchases of impact-resistant windows, doors, and garage doors.

On March 9, the House passed HB 1437, a bill that would consolidate Georgia’s six individual income tax brackets into one and lower the rate from 5.75 to 5.25 percent, effective in 2024. If this legislation were adopted, Georgia would join Iowa and Mississippi in enacting flat tax legislation this year. Additionally, on March 18, Gov. Brian Kemp (R) signed HB 304, immediately suspending the gas tax through May 31, and signed legislation issuing tax rebates of up to $250 for single filers or $500 per household.

Hawaii is the rare state mostly exploring tax increases, including a new corporate income tax rate of 9.6 percent (HB 1505 and SB 2242); a new top individual income tax rate of 13 percent above $500,000, which would be the nation’s second-highest; and eliminating the state’s preferential rate on capital gains income. SB 2242 has been deferred by the Ways and Means Committee, but no action has been taken yet on the House companion. At a time when most other states are cutting taxes to enhance their overall competitive standing, this could put Hawaii at a substantial disadvantage. Hawaii has a $1 billion budget surplus, and the one tax relief measure currently under consideration is Gov. David Ige (D)’s proposal of $100 refunds for each taxpayer and dependent.

Gov. Brad Little (R) promised $1.5 billion in additional tax relief over the next five years. Consistent with this pledge, on February 4, H0436 was enacted, reducing the flat corporate income tax rate and the top marginal individual income tax rate from 6.5 to 6 percent while consolidating five individual income tax brackets into four. The law also issues $350 million in one-time individual income tax rebates of 12 percent of Tax Year 2020 tax liability, or $75 per taxpayer and dependent, whichever is greater.

These reforms build upon the reforms made with the enactment of H0380 in 2021, which reduced income tax rates from 6.925 to 6.5 percent and consolidated seven individual income tax brackets into five. That law also offered individual income tax rebates.

A separate effort (H0448), not part of the governor’s proposals, would exempt groceries from the sales tax base, a far less efficient way to return revenue growth to taxpayers. To date, no action has been taken on this bill. However, a bill has passed the House and Senate that would increase the state’s grocery credit by $20 per person, a better-targeted alternative. 

Another bill, H0481, which has passed the House and Senate, would expand eligibility for the state’s property tax circuit breaker program, following legislation enacted in 2021 that imposed new limits on program eligibility.  

Gov. J.B. Pritzker (D) has proposed a one-year suspension of the 1 percent sales tax on groceries, freezing the gas tax rate for a year, and providing a property tax rebate of up to $300. Illinois Republicans are urging more tax relief and have put forth additional  legislation (HB 5481 and HB 5723) to address rising gas prices. Beyond that, major tax changes seem unlikely in Illinois this year, but one bill (HB 4330) would increase the state’s estate tax exemption to match the federal amount.

The legislature passed and Gov. Eric Holcomb (R) signed HB 1002, which will reduce Indiana’s 3.23 percent flat individual income tax—already the third-lowest in the nation—to 3.15 percent in 2023 and 2024. In subsequent years, the rate will be phased down further, to as low as 2.9 percent by 2029 if certain fiscal conditions are met.

Gov. Kim Reynolds (R) has signed into law H.F. 2317, a comprehensive tax reform package that accelerates and builds upon reforms enacted in 2018 and 2021. Most notably, this law consolidates Iowa’s nine individual income tax brackets into one and lowers the rate to 3.9 percent by 2026. Using tax triggers, the corporate income tax rate will also be reduced, ultimately to a flat rate of 5.5 percent. The law also excludes retirement income and certain farm rental income from taxation, a more mixed bag economically.

Legislators adopted substantial reforms with a veto override last year. This year, Republican lawmakers have proposed a corporate income tax rate reduction from 7.0 to 6.5 percent, with future reductions to follow. Additionally, Gov. Laura Kelly (D) has proposed using continued revenue growth to eliminate groceries from the sales tax and provide a one-time cash rebate. The Kansas House Committee on Taxation approved HB 2711, a bill to reduce the state’s general sales tax rate from 6.5 to 6.3 percent, and the sales tax on groceries from 6.5 to 3.5 percent. The legislature is also considering proposals to exempt Social Security income from taxation, reduce senior citizens’ property taxes, and cap the growth of government. On February 10, Gov. Kelly signed a major business tax incentives bill (S.B. 347) that includes a provision to reduce the corporate income tax rate by one-half of 1 percentage point after a qualified firm enters into an agreement under the incentives provisions of the bill and begins construction in Kansas.

The House and Senate, where Republicans have a supermajority, are working out differences between two vastly different plans to provide tax relief. As passed by the House, HB 8 would reduce the individual income tax rate from 5 to 4 percent and use tax triggers to eventually phase out the tax altogether. That bill would also extend the sales tax to additional services. The Senate-passed bill, SB 194, would issue more than $1 billion in income tax rebates of up to $500 for single filers and $1,000 for joint filers. Separately, Gov. Andy Beshear (D) has proposed a one-year reduction in the sales tax rate from 6 to 5 percent.

In March, legislation (HB 6) was enacted to prevent increases in motor vehicle valuation occurring since January 1, 2021, from increasing taxpayers’ vehicle property tax bills. That law also requires the use of a vehicle’s average trade-in value, rather than the rough or clean trade-in value, for property tax valuations in 2023 and beyond.

Gov. Janet Mills (D) has proposed increasing the property tax fairness credit for qualifying low- and middle-income property owners and renters, increasing the Earned Income Tax Credit, and issuing one-time rebates of $500.

On March 18, Maryland became the first state to enact a month-long suspension of the state’s fuel tax. Gov. Larry Hogan (R) is seeking to end his time in office delivering on his long-standing proposal to exempt retirement income from the income tax, and he has proposed expanding the state’s Earned Income Tax Credit. The governor and legislators are still negotiating details of the $350 million in tax relief in the state budget bill. The legislative session is scheduled to adjourn April 11.

The Bay State is not short on proposals to raise taxes. Even though the economic harms of gross receipts taxes are widely understood, lawmakers have proposed a 0.25 percent gross receipts tax on large businesses (H. 2855), in addition to several competing proposals to tax digital advertising as Maryland now does. Another bill (S. 1839) would increase the corporate income tax rate to 9.5 percent, and to 10.5 percent for financial businesses. In one break with efforts to reclaim the old Taxachusetts moniker, Gov. Charlie Baker (R) has proposed the elimination of the state’s 12 percent rate on short-term capital gains. Massachusetts is the only state to tax capital gains income at a higher rate than ordinary income. Gov. Baker is looking at a plan to return nearly $700 million in tax relief to low- and middle-income earners, but will likely face significant challenges with this in the legislature. A proposal to suspend the gas tax was rejected by the Senate.

Gov. Gretchen Whitmer (D) has vetoed a measure (SB 768) passed by the Republican-controlled legislature to cut individual and corporate income tax rates to 3.9 percent, increase exemptions for retirement income, and create a $500 child tax credit. The governor has indicated she prefers targeted tax relief for seniors and low-income taxpayers by exempting retirement income from the income tax and raising the Earned Income Tax Credit. 

Gov. Tim Walz (DFL) has proposed sending rebate checks of $500 per individual and $1,000 per couple with income below a certain level.

After much deliberation in 2020 and 2021, on March 27, Mississippi legislators sent a bill (H.B. 531) to Gov. Tate Reeves (R), which he is expected to sign, that would consolidate the state’s two individual income tax brackets into one while lowering the rate over time. Specifically, effective January 1, 2023, the bill would eliminate the 4 percent marginal rate on taxable income between $5,000 and $10,000. Then, starting January 1, 2024, the remaining rate of 5 percent would be reduced incrementally over three years, reaching 4 percent by 2026. The bill text signals the potential for additional cuts after 2026 that could lead to the eventual complete phaseout of the tax. This plan represents a significant improvement over previous proposals, both in terms of fiscal responsibility and reducing rates rather than increasing exemptions to reduce income taxes over time.

Gov. Mike Parsons (R) wants to trim the top individual income tax rate from 5.4 to 5.3 percent this year. Several Republican lawmakers would go substantially further. Missouri has adopted and then accelerated revenue triggers on multiple occasions, and SB 739 would revise current triggers to permit a 0.1 percentage point reduction for each $145 million over baseline collections, with an upward adjustment of the baseline after each cut, to allow government to retain half of future revenue growth. The pace of current collections is sufficient to lower the top rate to a projected 4.6 percent in 2023. Separately, SB 701 would repeal the corporate income tax, which brings in about $560 million a year. The state is currently showing a large surplus, with forecasts of robust future revenue growth as well. Legislators are also considering HB 2801, which would suspend the state’s gasoline tax for six months.

A Democratic lawmaker has introduced legislation (LB1264) consolidating and lowering income tax rates, with a top rate of 4.99 percent by 2028, and eliminating the inheritance tax in 2023, while expanding the sales tax to select services. It is one of the more comprehensive tax reform plans introduced thus far this year. The legislature has passed and Gov. Pete Ricketts (R) has signed a much more modest bill (LB310) that reduces inheritance taxes by increasing exemptions and lowering rates. In his state of the state address, Gov. Ricketts called for a range of tax relief efforts, including reducing the top individual income tax rate by 1 percentage point over five years. LB939, which remains under active consideration, seeks to lower the top marginal individual income tax rate from 6.84 to 5.84 percent by 2025 and the top marginal corporate income tax rate to 5.84 percent by 2026.

Legislators have proposed sending a one-time rebate of $25 to owners of vehicles registered in New Hampshire between July 2021 and June 2022.

Gov. Phil Murphy (D) in his budget address unveiled plans for an “ANCHOR Property Tax Relief program” that would replace the existing Homestead Rebate program and provide income-tested rebates to homeowners and renters to offset a portion of property taxes paid and rent increases. Under his proposal, funding for the program would increase over three years.

Gov. Michelle Lujan Grisham (D) signed House Bill 163 on March 8, which, among other reforms, reduces the state’s very broad-based, hybrid sales tax (which the state calls a gross receipts tax) for the first time in 40 years. The first reduction, from 5.125 to 5 percent, takes effect July 1. The second reduction, to 4.875 percent, takes effect July 1, 2023. That law also exempts Social Security income from state income taxes for taxpayers with income below a certain level and creates a SALT cap workaround.

Only New York and the District of Columbia raised income taxes last year, but now, while retaining the new higher top marginal rates, Gov. Kathy Hochul (D) wants to accelerate planned income tax cuts for middle-income taxpayers. These lower rates were intended to phase in by 2025, but Hochul suggests using the state’s large surpluses to institute the reduced rates by 2023, and to provide $2.2 billion in homeowner property tax rebate credits for low-and middle-income taxpayers and senior citizens. The new rate on income between $80,650 and $215,400 (after inflation adjustment) would be 5.5 percent, down from the 2021 rate of 6.33 percent. Before the phase-in, this income was taxed at 6.85 percent. In fact, not terribly long ago, 6.85 percent was New York’s highest rate, and if five temporary tax increases and extensions are ever allowed to expire (currently scheduled for 2027), it would be again. Even before the latest rate increase or the reduction for middle-income earners, almost 90 percent of individual income tax liability fell on the top 25 percent of earners, and about 63 percent on the 5 percent of filers with more than $200,000 in income, which the state’s budget director has cautioned is a cause of outmigration.

Some lawmakers are exploring the repeal of Ohio’s gross receipts tax, the Commercial Activity Tax (CAT). Under the proposal (HB 234), the tax would be phased out over five years, with full repeal in 2026. Ohio’s CAT was implemented in 2005 as a replacement for the state’s corporate income tax, a capital stock tax, and the tax on business tangible property. Public finance scholars and many Ohio lawmakers agree that gross receipts taxes are poor tax policy, but in Ohio, this recognition tends to be moderated by the recollection that its adoption represented a substantial net tax cut in the elimination of those three other taxes. Ultimately, however, repealing the CAT or replacing it with a different business tax could dramatically enhance Ohio’s tax competitiveness.

In his state of the state address, Gov. Kevin Stitt (R) proposed eliminating groceries from the sales tax base and lent his support to what he called a “taxpayer protection plan” to reduce income tax rates subject to revenue availability, which is currently a priority of many legislators as well. There are several bills on the table that make up a full tax package. This includes legislation (HB 3418/SB 1831) to allow permanent full expensing of qualified investments in machinery, equipment, and qualified improvement property, as well as legislation to move to single sales factor apportionment of corporate income and repeal the throwback rule (HB 3849). Other bills would fully repeal the state’s franchise tax, also known as a capital stock tax (HB 3131 and SB 1481). Another bill (HB 3350) would reduce the individual income tax rate from 5 to 4.75 percent and consolidate brackets to establish a flat tax. Legislation to suspend the state sales tax on groceries (HB 3349/SB 1494) is also being considered. HB 3418, 3131, 3350, and 3349 have all passed the House, and SB 1481 has passed the Senate.

Gov. Tom Wolf (D) has proposed reducing the corporate income tax rate from 9.99 to 4.99 percent over five years, in exchange for a shift to combined reporting. The House of Representatives has approved legislation (HB 333), now pending in the Senate, to increase small business expensing under Section 179 from $25,000 to the federal level of $1 million (inflation-adjusted). Pennsylvania’s current treatment is tied for the stingiest nationwide, whereas the $1 million level would represent current national best practice. At the same time, legislation has been introduced to raise the Commonwealth’s state sales tax rate from 6.0 to 6.5 percent to fund an additional property tax rebate for seniors (HB 2203).

Local governments may soon have discretion over whether to adopt tangible personal property tax exemptions of their choosing under a proposal in the budget of Gov. Daniel McKee (D). The governor also proposes a slight haircut to the $400 minimum tax (to $375) for businesses, but the flexibility for local governments to exempt some portion of tangible personal property from taxation is more significant and is in line with recommendations the Tax Foundation has made in other states as a way to reduce this tax on business investment. Senate Republicans have also proposed suspending the gas tax for the remainder of the year.

Gov. Henry McMaster (R) wants to implement a 1 percent across-the-board income tax rate cut over five years, beginning with a $177 million reduction. A tax cut bill that passed the House in February but has yet to be considered in the Senate, H. 4880, would lower the top rate from 7 to 6.5 percent and consolidate six brackets into three (with one being a zero percent bracket), retroactive to January 1, 2022. The bill would then gradually lower the top rate over at least five years’ time, contingent upon revenue projections, until the rate reaches 6 percent.

A different approach, found in S. 924, would adopt a single-rate 3.5 percent income tax and exempt the income of pass-through businesses. South Carolina already offers pass-throughs a preferential rate, but no state currently exempts them entirely while still taxing other forms of individual income, though Kansas did this briefly as part of its quickly reversed, budget-busting tax experiment. Whatever cuts South Carolina makes, zero-rating pass-through business income provides strong incentives for individuals to recharacterize their activity to claim the exemption. Separately, a Democratic legislator has proposed raising the top rate to 9 percent to fund non-means-tested annual $400-per-person checks (H. 4856).

In late February, a House-passed bill to reduce the sales tax rate was rejected in the Senate.

Democratic Sen. Heidi Campbell (D) has legislation (SB 1898) to reduce the sales tax rate by 1 percentage point. With the full repeal of the Hall Income Tax on interest and dividend income, Tennessee is now one of seven states not to tax any personal income, though the state has a high sales tax and several layers of taxes on business income, including the income of pass-through businesses normally subject to individual income taxes. Some lawmakers have proposed a 90-day gas and diesel tax suspension, but Gov. Bill Lee (R) has proposed a 30-day suspension of the state and local sales tax on groceries instead.

Lawmakers passed and Gov. Spencer Cox (R) signed legislation (SB 59) to trim the individual and corporate income tax rate from 4.95 to 4.85 percent, retroactive to January 1, 2022. The law also created a nonrefundable Earned Income Tax Credit (EITC) and expanded eligibility for the Social Security Benefits Tax Credit, a nonrefundable credit that offsets a portion of income taxes paid on Social Security benefits received.

The governor late last year proposed an income tax credit to offset sales taxes paid on groceries, but this measure did not get included in the final legislation.   

Earlier this year, Gov. Phil Scott (R) unveiled a proposal to increase the Earned Income Tax Credit to 45 percent of the federal credit, increase the Child and Dependent Care Credit to 65 percent of the federal amount, and expand eligibility for the state’s Social Security benefits exclusion. In February, a bill (H.510) passed the House that would create a refundable child tax credit and make the Social Security benefits exclusion available to more taxpayers by increasing the income threshold.

The regular session of the Virginia General Assembly adjourned on March 12 without the adoption of a biennial budget conference report. Gov. Glenn Youngkin (R) has announced a special session will be held on April 4 to take up a final budget. The biggest logjam between the Republican-controlled House and the Democrat-controlled Senate has been tax relief efforts. The House provisions, which largely mirror Gov. Youngkin’s supported tax policies, go much further than the Senate’s proposals. 

The House-approved budget would double the standard deduction from $4,500 to $9,000 for single filers and from $9,000 to $18,000 for married filers. Separate legislation to accomplish this same objective, HB 472, was carried over (postponed until 2023) in the Senate. The House budget completely eliminates the 2.5 percent sales tax on groceries and select personal hygiene products and includes a formula to backfill the local government portion (1 percent) with state revenues. Enabling legislation, HB 90, is in conference and is carried over to the special session. The House budget also provides a one-time tax rebate of $300 for single filers and $600 for married filers. Related legislation, HB 935, is in conference and is carried over to the special session. Finally, it also includes a one-year freeze of the recently adopted (2020) fuel tax increase. Related legislation, HB 1144, was defeated by the Senate. Following the conclusion of the regular session, Gov. Youngkin has indicated he will hand down legislation in the special session to adopt a complete fuel tax holiday for three months (May through August) and a partial reduction in September and October (50 percent in September and 25 percent October). House Republican leadership has endorsed the proposal, and presumably this would replace a proposal to partially suspend the tax for a full year. 

The Senate-approved budget eliminates the state portion of the sales tax on groceries and personal hygiene products. Enabling legislation, SB 451, is in conference and is carried over to the special session. The Senate budget provides a one-time $250 tax rebate for individuals and $500 for married filers. Related legislation, SB 579, simply provides that a tax refund shall be issued as provided for in the budget. Finally, the Senate budget provides for a fully refundable Earned Income Tax Credit. 

The most notable legislation in Washington is a Democratic bill (SB 5932) to reduce the sales tax rate from 6.5 to 5.5 percent, which runs counter to the many bills—this year and in prior years—to raise a range of taxes. Other bills introduced this year would allow local income taxes, impose high-rate gross receipts taxes on the sale of personal data, and increase the rate of the new capital gains income tax for the highest earners.

Although there was legislation introduced to reduce the tax burden of West Virginians, no tax package was passed before the General Assembly adjourned sine die. Gov. Jim Justice (R) used his line-item veto to exclude from the budget $265 million that was set aside for future tax relief, as there was no corresponding legislation. Last year, Gov. Justice, House Republicans, and Senate Republicans each proposed plans to substantially reduce income taxes, but no agreement was reached.

Republicans in the House and Senate rejected Gov. Tony Evers’ (D) proposal to send $150 rebate checks to every Wisconsin resident, wanting to instead use the revenue for permanent, structural tax reform.